IRA’s:



Adjusted gross income (AGI) - Income from all taxable sources

minus certain adjustments also called above-the-line deductions

Key to determining your eligibility for certain tax benefits & the phase-out of your eligibility for others.

It's the amount from which deductions (the standard deduction or itemized deductions) & the value of personal & dependent exemptions are deducted to arrive at the amount that will be taxed.

Gross income - income from taxable sources before subtracting any adjustments, deductions or exemptions.

Adjustments - Claim whether or not you itemize deductions & include:

deductible contributions to IRAs (individual retirement accounts),

2005: the limit for employees was $14,000 - plus an extra $4,000 for those age 50 & older.

2006: the basic limit is $15,000, & 50 & older can contribute an extra $5,000, for a maximum contribution of up to $20,000

job-related moving expenses,

any penalty paid on early withdrawal of savings,

the deduction for 50% of the self-employment tax paid by self-employed taxpayers,

alimony payments,

up to $2,500 of interest on higher education loans & certain qualifying college costs,

the $250 teacher deduction.

Adoption credit - refunds to you part of what you pay to adopt a qualifying child (not supporting a surrogate parent)

2005: as high as $10,630.

Eligible child is under age 18 or one who is physically or mentally incapable of caring for themself.

A special-needs child, the credit is $10,630 even if the adoption costs less than that.

2005: The right to the credit phases out as AGI rises from $159,450-$199,450.

Blind - totally blind, can’t see better than 20/200 with glasses or contact lenses,

or Your field of vision is 20 degrees or less.

Capital Gain - profit from the sale of such property as stocks, mutual-fund shares & real estate.

Gains from the sale of assets owned for 12 months or less are "short-term gains" & are taxed in your top tax bracket, just like salary.

Holding period - For most assets owned more than 12 months, profits upon sale are considered "long-term gains" & are taxed at 15%.

Taxpayers who fall in the 10% or 15% bracket get 5% on long-term gains.

Long-term gains rates do not apply to all gains from investment real estate.

To the extent that gain results from depreciation (depreciation deductions reduce your basis in the property & therefore increase gain dollar for dollar upon sale), a 25% rate applies (unless you are in the 10% or 15% bracket, in which that rate applies) to this "recaptured" depreciation.

Long term-gains from the sale of collectibles are taxed at 28%.

Capital loss - loss from the sale of assets such as stocks, bonds, mutual funds & real estate.

Losses are 1st used to offset capital gains & then up to $3,000 of excess losses can be deducted against other income, such as your salary. Any excess first offsets the other kind of gain, then other types of income.

Casualty loss - Damage from a sudden or unusual event.

After being reduced by $100, such personal losses are deductible to the extent that they exceed 10% of your adjusted gross income.

Charitable contribution - A gift of cash or property to a qualified charity. A receipt is required for any single contribution of $250 or more.

Child credit

For 2005, this credit is $1,000 for each child under age 17 you claim as a dependent on your return.

The right to this credit is phased out as adjusted gross income rises over $110,000 on a joint return, $75,000 on an individual return or head of household return & $55,000 if you're married filing separately.

Child- & dependent-care credit – DO NOT CONFUSE with the CHILD CREDIT

Claim part of the cost of paying for care for a child under the age of 13 or disabled dependent while you work.

2005: the credit — which ranges from 20% to 35% depending on your income

as much as $3,000 of qualifying expenses if you pay for the care of one qualifying child,

or up to $6,000 if you pay for the care of two or more.

College credits –

Hope credit is worth up to $1,500 per year per student & is available for the first 2 years of vocational school or college.

A lifetime learning credit is worth up to $2,000 per year for additional schooling.

Claim a Hope credit for each qualifying student (including yourself, your spouse or your dependent child) for paying tuition & other qualifying fees (but not the cost of books or room & board).

For example, 3 children in college at the same time could earn you $4,500 of credit.

Only 1 lifetime learning credit claimed each year for a maximum credit of $2,000 per tax return.

2005: The right to these credits disappears if AGI is between $42,000- $52,000 on an individual return & between $87,000-$107,000 on a joint return.

College expense deduction

Can deduct up to $4,000 of college expenses if their adjusted gross income is under $65,000 on a single return or $130,000 on a joint return.

This break is available whether or not your itemize deductions.

Not available to students who are claimed as dependents.

A $2,000 write-off will be allowed for qualifying taxpayers whose AGI fall between $65,000-$80,000 on a single return & between $130,000-$160,000 on a joint return.

You can not claim the deduction in the same year you claim a Hope or Lifetime Learning credit for the same student.

Taxpayers whose income is too high to benefit from the credits will benefit from this deduction write-off.

Combat pay - Military pay received by enlisted personnel in combat or peace-keeping efforts is tax-free.

Constructive receipt - Income at the time you could have received it, even if you don't actually have it is taxed.

A paycheck you could get in December is considered constructively received & taxed in that year, even if don't get the check until the following January.

Same applies to interest paid.

Coverdell education savings account - the education IRA, but has nothing to do with retirement.

Allows you to put up to $2,000 on how much can be set aside for any student in one year, in an account that will be used to pay college bills, primary & high school bills, a computer, qualify for tax-free disbursements or withdrawals.

There's no deduction for the contribution.??

Your FILING STATUS determines the size of your standard deduction & the tax-rates that apply to your income:

Single, married filing jointly, married filing separately,

head of household - Pay more than half of maintaining a home; for a qualifying person, for more than half the tax year

or qualifying widow or widower.

Deductions – in addition to claiming exemptions, you deduct expenses from your taxable income.

All taxpayers - standard deduction amount - $10,000 for 2005 joint returns,

half that amount on individual returns.

If your qualifying expenses exceed your standard deduction, you may claim the higher amount by itemizing your deductions, but must maintain records of qualifying expenditures if you itemize.

Exemptions - Claim a personal exemption for yourself. On joint returns claimed for each spouse.

Exemption for each dependent you claim on your return.

2005: Each exemption reduces taxable income by $3,200

(Phased out at higher income levels when adjusted gross income passes $219,950 on joint returns.)

Dependent - someone you support & claim a dependency exemption.

2005: Each dependent exemption knocks $3,200 off your taxable income.

2005: Each dependent under age 17 also qualifies for a tax credit that's worth $1,000

Higher-income taxpayers (with AGI over $218,950 on joint returns) can lose both the value of the exemption & the credit.

via direct transfer

No limit on the number of times you can move money.

Method must be used to move funds from a company retirement plan to an IRA, or else 20% of the money withdrawn from the company plan will be withheld for the IRS, even if no taxes are due.

Rollover - if you take possession of the funds to deposit them in the new IRA instead of direct transfer.

You can use rollover only once each year for each IRA account you own.

Permanently & totally disabled if:

not engaging in gainful activity because of a physical or mental condition; &

A physician determines that the condition has lasted or will last continuously for at least a year or can lead to death.

Earned income - Compensation, salary, commissions, tips, for personal services.

Unearned income - Interest, dividends, capital gains.

Education interest - College loans (Higher education expenses for you, your spouse or your dependent) interest deducted as an adjustment to income.

2005: Up to $2,500, but phased out at higher income levels.

Enrolled agent - A tax preparer passing an IRS test or has IRS experience, can represent clients at audits & appeals.

Estate tax - beginning at a 37% rate when a decedent's taxable estate exceeds $1.5 million.

Estimated tax

Income not subject to withholding, such as investment or self-employment income, quarterly payments of the estimated amount to cover your expected tax liability.

Gift tax

2005: $11,000 yearly to as many people you want. Gft tax is owed by the giver, not the recipient.

Hobby-loss rule

Requirement for deducting business losses is you are trying to make a profit.

You're in business for profit if you report a taxable profit for three years out of any five-year period.

Otherwise, your activity is assumed to be a hobby, unless you can prove otherwise.

If the expenses of a hobby exceed the income, the difference is considered a personal expense, not a tax-deductible loss.

Schedule A deduction: State Taxes pd.

Rounding - 5.75 & .0575 .1632 & 16.32

Side Notes: 18-24 mos. after ret. rec’d, they do auditing

Local taxes: .25 % State taxes: .625 %

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